Breaking the Buck

Breaking the buck occurs when a stable-NAV money market fund can no longer maintain its $1 share price and must reprice below $1. Under U.S. rules, repricing is required when the fund’s per-share value deviates downward by more than one-half cent from $1.

The term applies to funds seeking a stable dollar NAV. Institutional prime and institutional tax-exempt money market funds use floating NAVs, so ordinary small fluctuations in those funds are not described the same way.

Key Takeaways

• A stable $1 NAV is an accounting and regulatory objective, not a guarantee.
• Credit losses, liquidity costs, low or negative net income, and heavy redemptions can contribute to a break.
• A fund sponsor may choose to support a fund, but support is not assured.
• Breaking the buck can cause investor losses and accelerate redemptions.
• Modern liquidity and fee rules reduce some vulnerabilities but cannot eliminate investment risk.

The NAV Threshold

A stable-NAV fund can round a per-share value sufficiently close to $1 under applicable rules. If value falls below $0.995, it can no longer round to $1 and must reprice.

Worked Example: A Six-Tenths-Cent Loss

Assume a fund has $994 million of net assets and one billion shares outstanding.

NAV per share = $994 million / 1 billion shares = $0.994

The NAV is six-tenths of a cent below $1, which is beyond the half-cent rounding threshold. The fund would reprice below $1 rather than continue presenting a $1 share price.

An investor with 10,000 shares valued at $1 before the event would have shares worth approximately $9,940 at a $0.994 NAV, before any later recovery, fees, or liquidation effects.

What Can Cause a Fund to Break the Buck

• default or severe downgrade of a portfolio issuer
• decline in market value of short-term securities
• forced sales into an illiquid market
• redemption-related transaction and liquidity costs
• counterparty failure in a repurchase agreement or other transaction
• expenses exceeding portfolio income during very low-rate conditions
• operational or valuation errors, depending on severity and correction

Losses matter in relation to the fund’s small NAV cushion. A position does not need to represent the entire portfolio to create material stress.

Historical Example: Reserve Primary Fund

In September 2008, the Reserve Primary Fund announced a $0.97 NAV after losses connected to Lehman Brothers commercial paper. The event was followed by heavy redemptions across parts of the prime money market fund sector and became a central reference point for later regulatory reforms.

Historical sponsor support at other funds does not create an obligation for a sponsor to prevent future losses.

What Happens to Investors

Possible consequences include:

• immediate reduction in share value
• delayed or constrained access under extraordinary legal or operational circumstances
• liquidity fees where current rules and fund conditions require or permit them
• liquidation or restructuring of the fund
• tax and accounting consequences
• losses that differ from the first announced NAV as assets are sold or mature

The actual process depends on the portfolio, board actions, fund documents, SEC requirements, and market conditions.

Current Risk Controls

U.S. money market funds are subject to portfolio quality, maturity, diversification, liquidity, valuation, stress-testing, disclosure, and reporting requirements. SEC reforms adopted in 2023 increased minimum daily and weekly liquid assets and revised the liquidity-fee framework.

Those rules are designed to improve resilience, not to insure principal or promise uninterrupted liquidity.

How to Assess Breaking-the-Buck Risk

• Identify whether the fund has stable or floating NAV.
• Review government, prime, or tax-exempt portfolio category.
• Examine weekly and daily liquidity, maturity, and issuer concentration.
• Check exposure to private credit issuers and repo counterparties.
• Compare expenses with portfolio income in low-rate environments.
• Read the liquidity-fee and redemption provisions.
• Do not substitute a fund sponsor’s reputation for analysis of the legal guarantee.

This page provides general financial education, not investment, legal, or cash-management advice. A money market fund is not an FDIC-insured deposit and can lose money.

Official Resources

• Investor.gov: Money Market Funds explains the stable-NAV threshold and floating-NAV categories.
• SEC: Reserve Fund and Money Market Fund FAQ explains breaking the buck and the 2008 Reserve Primary Fund event.
• SEC: 2023 Money Market Fund Reforms details current liquidity and fee reforms.

Related Terms

• Money Market Fund: Short-term mutual fund that may use stable or floating NAV.
• Net Asset Value: Per-share value whose decline triggers the break.
• Run on the Fund: Rapid redemption pressure that can worsen liquidity stress.
• Liquidity: Ability to obtain cash without material loss.